The fourth-quarter drop from the previous three-month period was the third straight quarter of economic decline and suggested that Germany was in the midst of its worst recession since World War II.
For all of 2008, economic activity expanded by 1.0 percent when data was adjusted for the number of working days, a statement by the Destatis statistics service said.
Confirming figures first released on February 13, Destatis said that "the German economy declined markedly in the fourth quarter of 2008."
Going back before German reunification, analysts note that the drop was the strongest quarterly decline since early 1987, when a hard winter shut down construction activity.
Destatis said the main reason for Germany's current economic slump was a fall in exports, which plummeted by 7.3 percent in the fourth quarter while imports declined by a more modest 3.6 percent.
Germany, which accounts for about a third of all eurozone output, was still the world's leading exporter in 2008, just ahead of China, and has been slammed by the global economic slowdown.
German companies also cut investment in machinery and equipment as foreign orders dried up, though inventory building contributed slightly to business activity.
On an annual comparison, fourth-quarter gross domestic product (GDP) shed 1.7 percent from the same period in 2007, Destatis said.
A total of 40.8 million people were employed in Germany last year, an increase of about 1.0 percent from 2007 and the highest level since reunification, Destatis said.
But the rate of increase fell significantly as the year progressed, and unemployment stood at 6.6 percent at the end of 2008, it added, which curbed consumer spending.
"The final consumption expenditure of households dropped by 0.6 percent as compared with the previous year," the statement said.
Germany's jobless rate is expected to climb to 8.4 percent this year, officials said in January.
And the German economy will continue to contract in 2010 while other eurozone members return to growth, the European Economic Advisory Group said on Wednesday.
The EEAG, a pan-European economic think tank, forecast that the 16-nation eurozone economy would contract by 1.4 percent in 2009 before posting modest growth of 0.3 percent in 2010.
But Germany's economy was tipped to shrink by 2.2 percent this year and by another 0.2 percent in 2010.
"As an exporter of investment goods Germany was particularly hard hit by the decline in economic sentiment around the world," the EEAG report said. And looking ahead, "Germany is expected to be hit relatively hard" again, it warned.
"Large parts of the economy are very much dependent upon international trade," the group explained.